Promoting Financial Inclusion - An Authentic Approach To Promote Financial System

1. INTRODUCTION

Financial inclusion is the availability of banking services at an affordable cost to poor, uneducated and rural groups. In India the basic concept of financial inclusion is having a saving or current account with any bank. In reality it includes loans, deposits, fund transfer, insurance services and much more. Over the last few decades, access to basic financial services has become a necessary precondition for participating fully in the economic and social life of a modern society. In particular, access to and use of a bank account, offering a minimum of basic transactions has become key to social integration. . It is argued that as banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of public policy. The term Financial Inclusion has gained importance since the early 2000s, and is a result of findings about Financial Exclusion and its direct correlation to poverty. Financial Inclusion is now a common objective for many central banks among the developing nations.

2. STATEMENT OF THE PROBLEM

Financial inclusion was not a popular concept in earlier years in banking sector. Mostly the banker concentrated on the big profit yielding customer segments. Many areas not focused for example, the sections largely comprise marginal farmers, landless laborers, oral lessees, self employed and unorganized sector enterprises, urban slum dwellers, migrants, ethnic minorities and socially excluded groups, senior citizens and women. While there are pockets of large excluded population in all parts of the country, the North East, Eastern and Central regions contain most of the financially excluded population. There are a variety of reasons for financial exclusion. In remote, hilly and sparsely populated areas with poor infrastructure, physical access itself acts as a deterrent. From the demand side, lack of awareness, low incomes/assets, social exclusion, illiteracy act as barriers. From the supply side, distance from branch, branch timings, cumbersome documentation and procedures, unsuitable products, language, staff attitudes are common reasons for exclusion. All these result in higher transaction cost apart from procedural hassles. On the other hand, the ease of availability of informal credit sources makes these popular even if costlier. The requirements of independent documentary proof of identity and address can be a very important barrier in having a bank account especially for migrants and slum dwellers. The present study focus on stimulus and initiatives taken from the RBI is sufficient to meet the needs of the small traders, poor, uneducated and low income people.

3. UN INITIATIVE ON FINANCIAL INCLUSION

According to Former United Nations Secretary-General Kofi Annan, "The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives."As per the policy initiative of the United Nations, the main goals of Inclusive Finance are as follows:

1. Access at a reasonable cost of all households and enterprises to the range of financial services for which they are "bankable," including savings, short and long-term credit, leasing and factoring, mortgages, insurance, pensions, payments, local money transfers and international remittances.
2. Sound institutions, guided by appropriate internal management systems, industry performance standards, and performance monitoring by the market, as well as by sound prudential regulation where required.
3. Financial and institutional sustainability as a means of providing access to financial services over time.
4. Multiple providers of financial services, wherever feasible, so as to bring cost-effective and a wide variety of alternatives to customers (which could include any number of combinations of sound private, non-profit and public providers).

4. FOCUS OF FINANCIAL INCLUSION IN INDIA

The Indian economy is growing at a steady rate of 8.5 % to 9% in the last five years or so. Most of the growth is from industry and services sector. Agriculture is growing at a little over 2 %. The potential for growth in the primary and SME sector is enormous. Limited access to affordable financial services such as savings, loan, remittance and insurance services by the vast majority of the population in the rural areas and unorganized sector is believed to be acting as a constraint to the growth impetus in these sectors. Access to affordable financial services - especially credit and insurance - enlarges livelihood opportunities and empowers the poor to take charge of their lives. Such empowerment aids social and political stability. Apart from these benefits, FI imparts formal identity, provides access to the payments system and to savings safety net like deposit insurance. Hence FI is considered to be critical for achieving inclusive growth; which itself is required for ensuring overall sustainable overall growth in the country. The approach to FI in developing countries such as India is thus somewhat different from the developed countries. In the latter, the focus is on the relatively small share of population not having access to banks or the formal payments system whereas in India, we are looking at the majority who are excluded.

Generally, any talk of financial inclusion veers round to the integration of rural India into the banking fold. During the roundtable conference for bankers and financial service sector professionals to discuss issues that confront banks in meeting the requirements of next generation, there was mention of the challenge of reaching out to the next generation customer in rural areas but not a word about the urban poor.

The India-Urban Poverty Report 2009 states that the urban population is increasing at a faster rate than its total population and that while presently 28 per cent of the population is urban (286 million), by 2030, India will have 41 per cent of its population living in cities and towns. With India becoming increasingly urban, there is also an increase in the number of urban poor and the latest National Sample Survey Organization survey reports that there are over 80 million poor people living in the cities and towns of India. It is this large section of the population, which also lacks access to the most basic banking services - such as savings accounts, credit, remittances and payment services, financial advisory services, etc.

 
When the concept of "financial inclusion" was first mooted by the Reserve Bank of India in its annual policy statement of 2005-06, it was made clear to banks that while commercial considerations are important, banks are bestowed with special privileges and that they are, therefore, obliged to provide banking services to all segments of the population on an equitable basis.

 
Pursuant to this, the RBI advised all banks in November 2005 to make available a basic banking ‘no-frills' account either with ‘nil' or very low minimum balances as well as charges that would make such accounts accessible to vast sections of the population. The nature and number of transactions in such accounts could be restricted, but made known to a customer in advance in a transparent manner. All banks were also advised to give wide publicity to the facility of such ‘no-frills' account, including on their web sites, indicating the facilities and charges in a transparent manner. Significant progress has been made in the opening of such accounts and it is estimated that as on March 31, 2009, over 33 million had been opened. The first reaction would be to berate banks. But let us pause a moment. What is at the root of the problem where such significant progress is evident in the number of ‘no-frill' accounts opened and such glaring evidence to the contrary in the urban areas. There are three issues involved.

      Basically, there is a difference between the rural poor and the urban poor as far as proof of identity and address are concerned. In a village, almost everyone knows about everyone, whereas in the urban areas, one may not know who one's neighbor is, let alone be convinced of the identity and address of the urban poor. This, therefore, implies that if the instructions to banks are easy to apply in rural areas, they are not necessarily so in urban areas which brings us to the second issue.

      All along, banks have been made to focus on the KYC requirements and the risks involved in non-compliance thereto as a result of which the importance of being equitable and non-discriminatory in the rendering of banking services has been relegated to the background. When balances in all the accounts taken together by the ‘no-frills' accounts holder shall not exceed Rs 50,000 and the total credit in all the accounts taken together cannot exceed Rs 100,000 in a year, is the risk involved to a bank? If there is no risk involved for the bank or the banking system in maintaining such ‘no-frills' accounts, why can we not permit the opening of ‘no-frills' accounts on the basis of a simple self-declaration form regarding identity and address with photograph.

      The third issue is that the KYC formalities are only used as a convenient tool to block access to banking services to the urban poor. The real problem lies elsewhere. It is not the fear of risk involved but the fear of additional work involved. It lies in the unwillingness on the part of banks in urban areas to provide such services as it means more footfalls, more record-keeping, more work in general. This is just not acceptable. Firstly, there has to be a top-down approach in each bank to bring about an attitudinal change in this regard. Secondly, there has to be greater publicity and awareness among this section of the urban population about the availability of banking services.

Both, banks and the regulator, therefore, need to have a rethink on the above three issues, if they are at all serious about providing access to banking services to the urban poor. If acceptance of deposits and opening a bank account is difficult for the urban poor you can imagine what it would be on the credit side. The Rangarajan Committee Report on Financial Inclusion (2008) states, inter-alia, (i) that there are no clear estimates of the number of people in urban areas with no access to organised financial services, (ii) that even money lenders often shy away from lending to urban poor and (iii) that urban branches of banks, even though having manpower and technology.

5. CONCLUSION

The main reason for financial exclusion is the lack of a regular or substantial income. In most of the cases people with low income do not qualify for a loan. The proximity of the financial service is another fact. Most of the excluded consumers are not aware of the bank's products, which are beneficial for them. Getting money for their financial requirements from a local money lender is easier than getting a loan from the bank. Most of the banks need collateral for their loans. It is very difficult for a low income individual to find collateral for a bank loan. Moreover, banks give more importance to meeting their financial targets. So they focus on larger accounts. It is not profitable for banks to provide small loans and make a profit. Depositing money in a bank is also cumbersome work to the low savings groups. The bankers are not paying much attention on low income segment. But nowadays, the directives from the RBI causes for a big success in financial inclusion.